One of the first things that happens when you start a business is how quickly you feel flush with money. You do a job here you do a job there and suddenly you find yourself with all this cash. You immediately think to yourself, “This is great! All this money coming to me so easily and quickly. I should have quit my day job years ago.” But are you aware of depreciation: the silent business killer?
While such feelings of euphoria are normal when you first start your business, and should be enjoyed, don’t put too much stock in them because your feeling rich is really an illusion. Here’s why.
1. You may have forgotten that before your boss paid you, he took out taxes. When a customer pays, you as a self-employed contractor, you still have to pay taxes.
2. The second reason you feel rich is more insidious. It comes from the fact that you brought investment capital to your business before you began. You forget that you are earning money from borrowed money.
Let me explain with an example. Before you can enter the animal damage control field, you need to have a vehicle. Chances are most of you already had a truck or a vehicle to use in your business before you started. So, when you went to your first job and got paid 200 dollars, you took the trip on a vehicle that wasn’t paid for by the business but cost you several thousand dollars. In effect, you are still in the hole.
We may smile at this sort of business naivete, but the fact is it is more common than you think. Exposing this ignorance is the primary purpose of this article. I want to explain to readers why you may have felt this way and why later in your business life you don’t. The short answer is depreciation or in other words, the cost of replacement. Your equipment constitutes an investment in your business. The more you use that equipment the faster it will wear out. You need to charge enough money to compensate you for the replacement costs of your equipment. You also need to receive enough income in order to repay yourself and your family for your initial investment.
You may protest, “But the truck would have just sat in my driveway anyway. Why not use it to make some money?” I agree. But what new business people often forget is how using the vehicle for business also causes it wear out faster.” You need to take a portion of that money you have just received and set it aside for the purpose of replacing that vehicle. There are two ways to deduct vehicle expenses, mileage and actual costs. For the explanatory purposes I am going to use the mileage method.
In 2018, the IRS allows businesses to deduct 53.5 cents per mile for all business use of the vehicle. If you drive ten miles round trip on a job. You can deduct $5.35 from your $200 job. This money should be used to replace gasoline, care for maintenance, insurance and for the replacement of the vehicle. But as you know, most often business owners just pocket it and think to themselves, ‘Wow! Am I rich.” Let’s take this information on a larger scale.
Let’s say, you drive 30,000 miles a year for your business. With the IRS numbers, you will be able to deduct $16,050 dollars from your taxable income. Remember the reason the IRS does this is because it expects that you are paying for insurance maintenance etc. Now, let’s look at some expenses. Gasoline costs around almost $3.00 gallon at the time of this article. If your vehicle gets 18 miles per gallon then you would have spent 5,000 dollars in gas. Vehicle insurance (your insurance does allow business use of your vehicle right?) will cost around maybe $1,800 dollars a year. Ten oil changes (every three thousand miles) will cost around 40 dollars per change for another $400 dollars. 40,000 mile tires will cost around 800 dollars. Windshield wipers and incidentals let’s say add another 200 dollars. Total of expenses so far comes to $8,400 and this is a low estimate.
Let’s also assume that your vehicle is paid for and you have only 10,000 miles on it before you started your business. How long do you think your vehicle will last before it needs to be replaced? Let’s say you can get 130,000 miles on your truck before you scrap it. At thirty thousand miles a year you have four years before you must replace the vehicle. In light of the service length of your vehicle, consider the following:
In one year the IRS lets you deduct 10,350 dollars from your income statement. You have to pay out of pocket expenses for the following:
$ 400.00 oil changes
$ 800.00 tires
$ 400.00 miscellaneous
$8,400.00 Total Expenses for one year.
$7,650.00 left after one year to put aside to pay for a new truck.
Before you say, “I would love to have 30,600.00 dollars over four years to buy a new replacement truck.” consider that these expenses are very low. I haven’t counted the major expenses such as replacing brakes in year two. Possible transmission issues, tune ups, inspection stickers, taxes, etc. But I also have to mention that you already do have this money. You just may have spent it as income and not kept it aside for expenses. Will you?
The key here is you must be setting aside money in order to pay for a new vehicle. I would strongly recommend setting up a passbook savings account and put some money aside every month for truck replacement anStephen M. Vantassel, CWCP, ACE, is the owner of Wildlife Control Consultant, LLC. He helps people restore their balance with nature through publishing, training, consulting, and the internet. He has published numerous articles in trade and academic publications along with several books (http://kingsdivinity.academia.edu/StephenMVantassel). He is a sought after speaker and trainer. Copyright All postings are the property of Stephen M. Vantassel and Wildlife Control Consultant, LLC. Text (not images) may be reprinted in non-profit publications provided that the author and website URL is included. If images wish to be used, explicit and written permission must be obtained from Wildlife Control Consultant, LLC.d expenses. This way when you need to buy a new truck you won’t have to take out a loan etc. I hope you can see how this principle of depreciation affects other aspects of your business. All the equipment you use will eventually need to be replaced. Drills, batteries, flashlights, traps, ladders etc. are all depreciating and wearing out. This sort of fiscal discipline will also make you not think you are rich and will constantly remind you that you are in business and you are not as rich as you may think.
Stephen M. Vantassel, CWCP, ACE, is the owner of Wildlife Control Consultant, LLC. He helps people restore their balance with nature through publishing, training, consulting, and the internet. He has published numerous articles in trade and academic publications along with several books (http://kingsdivinity.academia.edu/StephenMVantassel). He is a sought after speaker and trainer. Copyright All postings are the property of Stephen M. Vantassel and Wildlife Control Consultant, LLC. Text (not images) may be reprinted in non-profit publications provided that the author and website URL is included. If images wish to be used, explicit and written permission must be obtained from Wildlife Control Consultant, LLC.